After a strong January and February, it’s looking like March was still a positive month for many hedge funds, although perhaps not as strong as the first two months of the year. L1 Capital’s Long Short Fund reported a return of 0.19% for March following January’s 4.33% gain and February’s 5.14% gain. L1 management describes the first quarter as “a pleasing start to 2019” as the fund is up 9.9% year to date.
The following is our rough coverage of the 2021 Sohn Investment Conference, which is being held virtually and features Brad Gerstner, Bill Gurley, Octahedron's Ram Parameswaran, Glenernie's Andrew Nunneley, and Lux's Josh Wolfe. Q1 2021 hedge fund letters, conferences and more Keep checking back as we will be updating this post as the conference goes Read More
Tesla short was a top contributor
One of the three positions L1 highlighted as a top contributor in its March report, which was reviewed by ValueWalk, was its short of Tesla. The stock plunged 25% since mid-December due to falling Model S and Model X demand. L1 management expects the automaker to return to losses this quarter and noted that Tesla management has been conducting large-scale layoffs and large price reductions. Tesla even announced plans to close all its physical stores, although that move was reversed later.
The automaker dramatically missed delivery expectations for the first quarter. Tesla reported that it delivered about 63,000 cars during the quarter, a wide miss from the 76,000 analysts were generally expecting. Production was also down on a quarter-over-quarter basis from 86,555 in the fourth quarter to 77,100 in the first quarter. The company also warned that due to the lower-than-expected delivery numbers and "several pricing adjustments," its net income for the first quarter will likely be "negatively impacted."
That report was rather like a gift for Tesla short-sellers such as L1 Capital.
Shorting Tesla's CEO
L1's management still sees Tesla as a "compelling short, given the soft demand outlook for their cars, continual loss of senior executives, rising competitive pressures, widespread director selling, stressed balance sheet and erratic CEO."
Of course, L1 is referring to Elon Musk's well-documented antics, like his usage of Twitter, which has gotten him in trouble with the Securities and Exchange Commission. Some would argue his tweets rival those of President Trump on some days. Musk has also made headlines for smoking pot on a podcast, among other shenanigans.
Tesla stock rallies on tax subsidy news
L1 also noted that Tesla stock has also struggled because the tax subsidy on the company's electric vehicles has begun to fall. However, the shares rallied today after U.S. lawmakers started pushing to expand the tax credits for electric vehicles.
The credit on Tesla's vehicles was cut in half to $3,750 for all cars bought after Jan. 1, but some lawmakers want to add a $7,000 credit for an extra 400,000 EVs sold by each automaker. That would be added to the $7,500 credit that was given on the first 200,000 EVs sold by each automaker. At this point, it's still only a bill that may or may not pass, and yet, Tesla fans were quick to pick it up and run with it—again disregarding the company's own warnings.
Other contributors to L1's March returns
The fund's other two top contributors last month were its long positions in Chorus and Lynas. Chorus shares jumped 14% during the month due to its strong operating trends, the industry's improved regulatory environment, and its "exciting dividend growth profile," according to L1. Even though the stock has jumped a lot, the fund's management still believes it is "extremely undervalued and owns one of the highest quality fibre internet assets in the world."
Wesfarmers offered to buy Lynas for $2.25 per share, but L1 believes the offer significantly undervalues the company. The stock was trading around $2.70 per share in May 2018 right before the Malaysian environmental investigation, so L1 sees the low bid as opportunistic. The fund also doesn't believe the company's current stock price reflects the "structural growth in rare earths demand and the unique strategic value of Lynas' asset base" as the only "significant" producer of rare earths outside China.
This article first appeared on ValueWalk Premium